HONG KONG - ASIAN stock markets dropped on Tuesday amid worries about the staying power of a three-month rally.

Major market Tokyo shed nearly 1 per cent, while the dollar slipped against the yen.

Stocks worldwide have surged since March, pushing a number of markets upward 40 per cent and more, on expectations that the deepest stretch of the global recession may be over.

But uncertainty about the strength of any recovery is now leading many investors to question whether the recent rally may have overvalued companies.

The threat of inflation, as governments spend hundreds of billions and cut interest rates to historic lows to prop up their economies, is also unsettling investors more and more. A downgrade of Ireland's debt rating overnight - the country's second this year - only added to fears about the unhealthy consequences of massive government bailouts.

'Investors are a bit cautious and happy to be taking some profits,' said Miles Remington, head of Asian sales trading at BNP Paribas Securities in Hong Kong. 'You're caught between a rise of such speed and tremendous gains versus other concerns. So in the short term there could be some downside.'

Looking ahead, investors will also be eyeing announcements in the US about which of the country's biggest banks will be able to repay billions in federal bailout dollars - and free themselves of executive pay restrictions that come with the money. The government may issue that list as early as Tuesday.

Wall Street's session was largely directionless as investors wavered between concerns the rally is overheating and fears of missing any more upside.

The Dow closed mostly flat, up 1.36, or less than 0.1 per cent, at 8,764.49. The Standard & Poor's 500 index slipped 0.95, or 0.1 per cent, to 939.14.

Wall Street futures pointed to a lackluster open in the US. Dow futures rose 1 point to 8,760 and S&P futures dropped 0.4 to 938.40.

Oil prices rose in Asia as traders mulled whether a weak global economy justified a doubling of crude since March. Benchmark crude for July delivery was up $1.10 (S$1.60) to $69.19 a barrel; the contract fell 35 cents overnight.

In currencies, the dollar edged down to 98.18 yen from 98.39 yen.

The euro was lower at $1.3909 from $1.3927. -- AP

TOKYO

Japanese share prices closed down 0.80 per cent on Tuesday as investors cashed in on a recent rally, dealers said.

The benchmark Nikkei-225 index fell 78.81 points to 9,786.82. The broader Topix index of all first section shares lost 8.65 points, or 0.93 per cent, to 918.24.

HONG KONG

Hong Kong share prices closed 1.07 per cent lower on Tuesday, as investors took profit from recent rallies, dealers said.

The benchmark Hang Seng Index closed down 194.90 points at 18,058.49. Turnover was HK$71.93 billion.

SHANGHAI

Chinese stocks rose 0.71 per cent in shrinking turnover to a 10-month closing high on Tuesday, with financial and airline shares strong after news of possible high-profile acquisitions in those sectors.

The Shanghai Composite Index ended at 2,787.887 points.

Gaining Shanghai A shares outnumbered losers by 471 to 434, while turnover in Shanghai A shares shrank to 132.9 billion yuan from Monday's 138.7 billion yuan.

KUALA LUMPUR

Malaysian shares closed down 0.10 per cent on Tuesday due to selling in blue-chips including top bank Maybank, dealers said.

The Kuala Lumpur Composite Index lost 1.06 points to 1,071.79. Losers outnumbered gainers 311 to 306. -- AFP, REUTERS, BERNAMA